Fund Name: Truffle MET General Equity Fund Co-Portfolio Manager: Iain Power
Fund Description
The Truffle Equity Fund is a general equity portfolio with the objective of achieving positive real returns over time. The investment approach is valuation based focusing on stock selection in its pursuit to outperforming the JSE All share Index. The target is to outperform its benchmark consistently by 2% to 4% per annum.
Background and Past Performance
Since inception (October 2015) the fund has produced an annual return of 13.2%, 1.5% above the benchmark. Over the last five years the fund’s performance is ranked 13th out of 91 general equity funds ranked by Morningstar.
Truffle Asset Management was set up in 2008 by ex RMB Asset Management senior managers. The Truffle team is very experienced and comprises largely ex RMB Asset Management members.
The business has grown strongly since inception to now have R20bn under management.
Over the last 12 months the fund’s performance has been disappointing, declining 7.9% and has underperformed its benchmark by 3.4%. This poor performance can largely be ascribed to being unfavourably positioned to the Brexit outcome in July. Brexit was mostly a surprise to investment markets, but Truffle had not put enough protection in place to counter the negative effects in certain investment categories.
Investment Style
The investment approach is valuation based focusing on stock selection. They seek out companies with good management with solid businesses that are undervalued. The portfolio comprises between 35 and 40 shares where over and underweight positions are taken relative to the benchmark. It is unlikely to take a position of more or less than 5% above or below the benchmark.
Investment Process
It is largely a stock picking approach driven by fundamental company analysis and meeting with management. A flexible valuation approach is used centring around normalised earnings through the business cycle.
Shares are risk weighted based on volatility relative to the benchmark, which categorises them into different levels of over and underweight positions allowable.
Some macroeconomic view is overlaid to mostly balance their commodity exposure.
Portfolio Positioning
The fund is 54% invested in Rand hedge shares and shares that do not rely on the local economy. It is underweight local consumer related sectors and neutral on banks.
Major over and under positions relative to the All Share Index
Overweight
Old Mutual 4.5%
First Rand 3.5%
Sasol 3.1%
BAT 2.3%
Underweight
Billiton -4.7%
MTN -3.2%
Richmont -2.6%
Sanlam -1.8%
Flow of funds
R6bn has been invested into their various funds over the last 12 months.
Fund Manger invested in the fund
From the date of joining the firm all future individual investments need to be in firm’s funds.
Fund Manager’s Market Views
The market is too optimistic on earnings expectations.
Overall markets are not cheap and they are being supported by low interest rates. They expect higher volatility and therefore they are defensively positioned.
Over the next year they expect low returns from global developed markets. In particular they believe the US market is expensive. Reasonable returns are expected from local rand hedge sectors. They forecast the Rand to weaken by the inflation deferential between SA and developed economies.
Investonline’s View of the Fund
Truffle has a very experienced investment team that has a serious vested interest in the performance and success of their funds.
Their fundamental research and stock selection approach should add value to the fund’s risk proposition. However, their flexible valuation approach and minor macroeconomic overlay does concern us in identifying overall portfolio risk.
This was exposed during Brexit resulting in the fund’s poor performance over the last 12 months. Management confesses they have learnt from Brexit and better risk controls are in place.
The fund is 54% invested in Rand hedge shares, is underweight commodities and SA consumer sectors.
We maintain our view that the Rand should strengthen further over the next 12 months to below 13 to the US dollar. This will favour SA consumer sectors (most notably banks) and restrict growth in Rand hedge shares.
We recommend now is not the time to be invested in the Truffle General Equity Fund, but do believe this is a fund and asset management team to monitor into the future.
